Judges' agreement on healthcare penalties not being a tax is key

Federal judges who have ruled on the constitutionality of healthcare reform have split along but party lines, but they all agree on one thing: The law’s fine for failing to obtain health coverage is a penalty, not a tax.

The three federal judges who have upheld the law so far are all President Clinton appointees, while the two judges who struck it down are Republican picks, so the fact that there is common agreement on the point could be significant.

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Outside legal circles, the distinction may seem like a semantic argument, but the distinction between a penalty and a tax became a sticking point during the reform law debate.

The Constitution grants the federal government wide latitude to impose taxes — but not penalties — for the population’s general welfare.

The Supreme Court is expected to take up the healthcare law in the near future, and the question of whether the so-called individual mandate to buy coverage is constitutional will loom large. If the court finds that the mandate is not within the power of the legislative branch, they could strike it down, potentially crippling the entire law.

Beginning in 2014, the healthcare law requires individuals to have coverage or pay a fine. The starting fine for an individual without health insurance will be as little as $95, but by 2016, the penalty jumps to $695, or 2.5 percent of taxable income, whichever is greater.

In September 2009, when the law was still being crafted, President Obama vigorously denied that the mandate to buy insurance — and its corresponding penalties — constituted a tax increase. That would have violated his campaign pledge not to raise taxes on families making less than $250,000 a year.

“For us to say that you've got to take a responsibility to get health insurance is absolutely not a tax increase,” Obama told ABC’s George Stephanopoulos during a contentious exchange.

The tax argument is somewhat of a fallback argument for the administration. The judges who have upheld the law have sided with the administration’s stance that Congress has the power through the Constitution’s Commerce Clause to regulate an individual’s decision not to purchase health insurance.

However, the six federal judges who have ruled on the merits of the tax argument have all called foul, according to Santa Clara University tax and constitutional law professor Brad Joondeph, who runs a blog that tracks legal challenges to the reform law.

U.S. District Judge Henry Hudson, a President Reagan appointee who was the first to rule against the individual mandate, said the law’s final language deceptively labeled the fine a tax. Hudson noted that draft version of the legislation called the provision a penalty before switching it to “tax” at the very end.

“This shift in terminology during the final hours preceding an extremely close floor vote undermines the contention that terms penalty and tax are synonymous,” Hudson wrote in his December decision.

Even though District Judge Gladys Kessler upheld the individual mandate this week, she rejected the Obama administration’s tax argument.

“The findings demonstrate that the goal … is not to raise revenue, but to achieve near-universal health care coverage by giving individuals the incentive to maintain their health,” Kessler wrote.

Joondeph said the fact that federal judges aren’t buying into tax argument might come into play when the Supreme Court hears the challenges, most likely sometime in 2012.

“I think the politics of explicitly labeling something a tax — and the apparent attempt to evade that political accountability in this case — is influencing how the courts are resolving the issue,” he said. “And it may well influence the Supreme Court once the case gets there."

The political problem for Democrats is that it doesn’t really matter what you call it — the individual mandate remains largely unpopular. A Kaiser Family Foundation poll this week found that two-thirds of Americans support repealing the individual mandate.

Supporters of the law say the individual mandate is necessary to expand coverage while including new consumer protections, such as a ban on discriminating against preexisting conditions and dropping individuals from health coverage for an unintentional clerical error.

But the provision’s unpopularity has centrist Democrats scrambling to pitch alternatives to the individual mandate.